My friend wrote (as quotes):
Thank you. Yes, it's the most heavily cited book on investing [Intelligent Investor], probably.
You have to wonder though. The strategies that have been most successful the last quarter century of investing have bought stocks with low book value per share and completely avoided stocks with high bvps. So it makes you wonder if Intelligent Investor itself is something that is no longer relevant.
It's plausible. Usually one has to be careful about "this time it's different", but I think there are plausible arguments against Graham.
There's a lot of "it depends" of course (all my arguments here are contingent), but one problem with low book-value shares is that they quite often earn a low return on capital. They may actually be destroying shareholder value, or if not, be able to grow earnings. Suppose a company just keeps the same earnings year after year. What is it worth? Well, in that case its value rests solely in the dividend payout. So then you look at the dividend yield and compare it with the risk-free rate. Is it higher or lower. You also have to factor in that the dividend payout might decline. You may find that this so-called value share is overpriced.
Take a company like Polaroid or Kodak. It was a favourite of value investor Bill Miller. Well, both those companies were oligopolies (along with Fuji film) - great - but they were facing technological obsolescence, with turned out to be ultimately fatal. Miller rode these these companies all the way down until he hastily disposed of them right before they went bankrupt. Ouch.
Graham talked about Parker Pen, a company that at the time was trading below book value, even below net current assets. Graham lamented 'But now, if the "market doesn't like the company," not only renowned trade names but land, buildings, machinery, and what you will, can all count for nothing in its scales."
In the short term you would have made money out of Parker Pen. Long term, I'm not so sure. It seems that in 1992 Parker pens was sold for £285m to Gillette. There was a management buyout in 1986 for £50m from Manpower. I don't know what Manpower acquired it for. Unfortunately I don't know what Parker was valued at in 1970 when Graham wrote Investor either. It seems likely that as a long term investment, it was pretty shoddy.
Contrariwise, I wrote in a blog that American Home Products was trading at 31X earnings at the time but went on to return nearly 10% annualised over the next 40 years.
I read an article that said that around the early 1980s, the USA changed which kinds of firms were allowed to be listed on the stock market. This completely changed the nature of investing, apparently, since the average lifetime of a listed corporation fell to just 7 years and made investing much more casino-like.
I think it was Bessembinder's article, the one that said that the average stock makes the same as Treasuries, with 96% of the excess return of the stock market (returns higher than bond interest) coming from just 4% of stocks. This effect apparently got much stronger after the early 1980s. That would seemingly invalidate any major investment strategy that doesn't simply buy an index, because finding that 4% of stocks who're going to be the outsize winners is about as easy as picking the 4% of customers who leave the casino each night (slightly) positive on their winnings - impossible.